ACM Partnership, Southampton-Hamilton Company, Tax Matters Partner - Page 12

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          benefits would have been too great.23  The nontax benefits of               
          holding and selling Kannex's share of the notes would be shared             
          in the same ratio as the costs associated with that share, but,             
          in all events, these benefits would necessarily be less than the            
          costs.                                                                      
               If the section 453 investment strategy was economically                
          justifiable in part on the basis of expected pretax returns, and            
          the partners understood that Colgate, as the beneficiary of the             
          strategy, would bear virtually all transaction costs, then the              
          strategy must have provided Colgate a realistic possibility of              
          recovering these costs for the section 453 investment strategy to           
          be deemed profitable.  We examined the proposition that Colgate             
          could reasonably have expected to recover the transaction costs             
          of the strategy through cash flows from the LIBOR Notes, and we             
          now set forth our analysis with respect thereto.                            
               Colgate's return was a function of two variables.  First,              
          the credit quality of the issuers of the LIBOR Notes could have             
          affected Colgate's returns.  The possibility of benefitting from            

               23 The BOT Notes had a tax basis of $104.467 million.  Even            
          if we assume that interest rates rose by 500 basis points,                  
          causing an increase in the cost to acquire Kannex's interest in             
          the notes from $20.955 million ($25.361 million x .8263) to                 
          $29.283 million ($35.439 million x .8263) and a decrease in the             
          taxable loss recognizable on the sale of Kannex's interest in the           
          notes from $66.842 million (($104.467 million - $23.574 million)            
          x .8263) to $58.622 million (($104.467 million - $33.521 million)           
          x .8263), each $1 that Colgate paid to acquire Kannex's interest            
          would still produce more than $2 of taxable losses.                         






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